Monopolistic Competition and General Equilibrium

Abstract

Traditional general equilibrium theory, as exemplified in Walras (1874–7) and Hicks (1939), was concerned only with perfect competition, though it was preceded by Cournot’s theory of oligopoly (1838), where perfect competition is only a limiting case of oligopoly. Walras (1874–7, p. 431) admitted that perfect competition is not the only possible system of economic organization and that we must consider the effects of other systems, such as those of monopolies, in order to make a choice between perfect competition and the other systems, as well as to satisfy our scientific curiosity. His theory of monopoly, however, remains a partial equilibrium analysis and no general equilibrium model is developed for an economy which contains monopolies. Hicks was more explicit in excluding monopolies from general equilibrium theory. He insisted that ‘a universal adoption of the assumption of monopoly, must have very destructive consequences for economic theory’ (1939, p. 83). The effect of an increase in demand on price is indeterminate, if the expansion of the firm is stopped not by rising costs, as in the case of competition, but by the limitation of the market, as in the case of monopoly.